Question

X Company is considering buying a part next year that they currently make. This year's production...

X Company is considering buying a part next year that they currently make. This year's production costs for 3,200 units were as follows:

Per-Unit Total   
Direct materials $2.61     $8,352  
Direct labor 3.88     12,416  
Variable overhead 4.20     13,440  
Fixed overhead 5.10     16,320  
Total $15.79    $50,528


A company has offered to supply this part to X Company for $14.14 per unit. If X Company accepts the offer, it will still incur fixed costs of $7,997, but it will be able to lease the resources that will become available from not making the part for $3,000. At what production level would X Company be indifferent between making and buying the part next year?

Homework Answers

Answer #1
Per unit Total 3200 units
Make Buy Make Buy
Direct materials 2.61 8352
Direct labor 3.88 12416
Variable overhead 4.20 13440
Avoidable fixed overhead 8323
Opportunity cost 3000
Outside Purchase cost 14.14 45248
Total cost 10.69 14.14 45531 45248
Difference in cost = 45531-45248 = 283
Increase in production level = 283/(14.14-10.69)= 82
Indifferent production level = 3200+82 = 3282
3282 is correct answer
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